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Guaranteed income is a no-brainer—just don’t call it an annuity

Those near or in retirement really like the idea of receiving a Guaranteed Lifetime Income (GLI), a study released Tuesday says. But tell them this is the same as an old-fashioned life annuity, and suddenly many lose interest.

Quotes in the article

That’s a pity because, as this column has long argued, there is a growing need for a Guaranteed Lifetime Income, particularly as employer-sponsored defined benefit pensions fall by the wayside.

The prevailing bias against annuities is in evidence again, with the results of a new 2018 Canadian Guaranteed Lifetime Income Study, conducted by Greenwald & Associates and CANNEX for two Canadian insurance companies.

In the study, almost half of the subject (aged 55 to 75) cited concerns like inflation, low interest rates and stock market volatility when it comes to having enough money in retirement. Any yet the study confirmed that annuities, which can help resolve those challenges, remain poorly understood—both for their benefits as well as their drawbacks.

CANNEX and Greenwald found similar perceptions of the positives and negatives of annuity-type products on both sides of the Canada-U.S. border. Two-thirds of respondents like the peace of mind and longevity protection of GLI, which makes it easier to budget. But the top negatives are also familiar: having to hand over capital to an insurance company, the possibility of dying early and not getting all your money back (or be able to pass on to your heirs), high costs and too many terms and conditions.

Whatever you call it, the percentage of Canadians who value some kind of guaranteed income is rising sharply. The number of those who see it as a “highly valuable” supplement to government retirement sources like CPP and OAS has jumped from 60% in 2015 to 80% today.

Longevity and outliving savings is a particular concern for women, along with not being able to afford long-term care expenses. It’s a fact that women have longer life expectancies, and the online study (commissioned by Great-West Life Assurance and Sun Life Financial) shows their retirement worries are greater as a result:

The study found 34% of women are highly concerned about not being able to maintain their standard of living once they retire, compared to only 17% of men.

Some 37% of females worry about long-term care expenses in old age, versus just 20% of men.

Women place more importance on having GLI at all stages of retirement: early, middle and late; and 76% of them think it important that their essential living expenses be covered by a GLI source, versus 64% of men.

The study, conducted in February with 1,003 Canadians with financial assets of at least $100,000 (not counting a home), found only 45% are highly confident they will be able to maintain their standard of living in retirement, assuming a life expectancy of 85.

As we have noted in the past, it’s surprising annuities aren’t more popular, given the ongoing decline in private-sector DB pensions and the rise in longevity.

The study found a relatively low ownership of income annuities or segregated funds: 19% of women owned them, and 20% of men.

Even now, DB pensions are still three times more common across households: 65% of women said they expect to receive some retirement income from an employer DB plan, versus 61% of men.

As leading retirement experts like author Moshe Milevsky have said, capital-appreciation vehicles like RRSPs, group RRSPs or Defined Contribution pensions are no substitute for “real” pensions like DB plans, which provide a guaranteed income for life no matter how long you live.

Those lacking true pensions may attempt to rely on financial assets (RRSPs, TFSAs, non-registered savings) but the onus is on investors to manage their money in the face of the uncertainties of stock markets and low interest rates. The stark reality is that a combination of a very long life, plus perpetual minuscule interest rates, plus stock-market losses, could well mean running out of money before you run out of life.

That’s why Milevsky (who has also called for a revival of tontine annuities, as per a recent column in this space), wrote the book Pensionize Your Nestegg. That book, which we have reviewed, argues that those lacking true pensions need to use annuities or their variants to cope with market uncertainties, not to mention the challenge of outliving your money. There’s a good reason annuities have been described as “longevity insurance.”

Some critics of annuities have argued financial advisors aren’t incented to recommend annuities; they typically generate only a one-time commission, while asset-based advisors stand to generate a fee every year a client stays with them (thereby creating a de facto annuity for the advisor, which is ironic). However, the GLI study found that in both countries, one of the top sources of information on GLI products is financial advisors: 24% heard about them from advisors, versus 18% at financial institutions and 15% by news media.

Even so, Great-West Life senior vice president Sam Sivarajan said in a press release that among the 75% of respondents working with advisors, retirement income conversations are still focused on asset withdrawals and investments paying dividends or interest: “The study shows that guaranteed lifetime income products, more often than not, aren’t part of these discussions.”

It’s surprising how the “annuity” label can be a turnoff for retirees who might otherwise benefit from GLI products. The survey found 70% of those who owned GLI products were satisfied and 60% thought them very important to their financial security. But if the GLI product was labelled as an income annuity or segregated fund, 41% became less interested.

41% were unfamiliar with income annuities but 67% had no knowledge of seg funds;

by contrast 74% were familiar with GICs, term deposits and Guaranteed Interest Annuities and 73% with mutual funds.

In both countries, clients believe financial advisors have a responsibility to discuss GLI: 70% of American respondents thought so, as did 73% of Canadians. And advisors should take heed of this factoid: many felt that failure to at least discuss the GLI option would be a reason to consider changing their advisor! Even so, while 79% were satisfied with the financial advice they are receiving, only a third had actually had the GLI conversation with their advisor.

To me, GLI is a no-brainer, at least for a portion of your retirement plans: the money you absolutely need to meet monthly living expenses in retirement. By all means, invest money you can afford to lose in the markets and reap the probable, albeit not assured, healthy returns over the long term.

It’s important to eat well and enjoy a few of life’s luxuries in our golden years. But we also need to sleep well: We all need income, we want it for as long as we live and we want it guaranteed. That’s what GLI products should provide. What’s not to like?